Why peppercorns are being smuggled by the ton from Vietnam to Sri Lanka

Money tree.
Money tree.
Image: REUTERS/Radu Sigheti
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The dried, wrinkly black fruit of the pepper plant was once so valuable that peppercorns were used as a kind of currency. These days, the spice remains sought after despite its relative expense, featuring in virtually every meal on dining tables the world over. Demand for peppercorns is high, and rising: as any aspiring chef will tell you, there’s simply no substitute for its pungent taste.

The world’s top exporter of peppercorns is Vietnam, where local farmers have shifted away from other formerly popular crops, such as coffee. The country’s spice haul is sold around the world, but seldom in India, where government price-fixing sets local peppercorn prices way above the going rate in other markets.

Because of that, there’s money to be made by selling Vietnamese peppercorns at Indian prices—if you can find a way to bypass India’s high tariffs and minimum import prices. Some rogue traders are now doing just that: they reportedly ship the peppercorns to Sri Lanka, re-label them, and sell them on in India for a much higher profit than if they had exported them directly to the large, pepper-loving nation.

India was once one of the world’s biggest pepper suppliers. But over time, demand has risen while production has not. The country now consumes almost all its locally grown pepper, leaving little for export. In India, peppercorns are mostly grown as a secondary cash crop in coffee plantations, says Greg Estep, who runs the spice business at agribusiness group Olam. “For the planters, it is a very important source of income,” he notes.

Those already low incomes are put under pressure if Indian consumers can easily get their hands on cheaper peppercorns from elsewhere, undercutting the Indian government’s attempts to protect these farmers. The government has imposed import duties of 52% on pepper originating from ASEAN countries such as Vietnam and Cambodia, and 70% on peppercorns from countries such as Brazil and China, resulting in a retail price of around $7,000 per metric ton—a multiple of the spice’s price elsewhere.

But there’s a loophole for enterprising spice traders. Under the South Asian Free Trade Agreement, Sri Lankan peppercorns have a duty of just 8% in India. And shipments under 2,500 metric tons carry no duty whatsoever.

Because Vietnamese peppercorns are among the cheapest in the world, there are big profits to be made, especially since even the most discerning of buyers can’t always tell the difference between Vietnamese varieties and those from elsewhere. Pepper traders can therefore illegally re-export Vietnamese peppers from Sri Lanka for as much as three times the price they bought it for.

Speaking to the Times of India, an exporter explained that Sri Lanka’s authorities were also issuing incorrect certificates of origin for these peppercorns, saying that they had been locally produced. “The government of India is taking measures to restrict it by having strict Certificate of Origin requirements,” Estep says, “but still some volumes do slip through various loopholes.” According to the International Trade Centre, Vietnam has not exported any peppercorn to Sri Lanka this decade.

Stabilizing Vietnam’s peppercorn prices could be the best way to curb the sharper practices in the trade. At the moment, prices are incredibly volatile, and may fluctuate by as much as 40% in a year. There are many reasons for the turbulence, though a lot of it comes down to the supply chain, which is at the mercy of adverse weather conditions and the willingness of smallholder farmers to grow what Estep describes as a labor-intensive, “delicate crop requiring lot of aftercare.”

Even if farmers decide to boost how much space they devote to peppercorns, the returns don’t come for three to four years after planting, Estep says. Big upfront costs also mean that farmers who are struggling usually keep going until they recoup their investments, however long that takes. Once harvested, peppercorns are sold on from one aggregator to the next, then to a series of processors who convert the raw corns into a sterilized product able to be sold on to a retail packer.

Given this long, multi-step process, attempts to stabilize these prices out of Vietnam, much less set a benchmark for them, have not been too successful. A derivatives exchange in Singapore created a global futures contract for pepper in 2012, but it stopped trading 2014 when the exchange was acquired and its new owner didn’t have a taste for it.